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Emerging Markets : IPO Fever Shows no Sign of Abating

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Chevron Corporation picked up a 5% stake in Indian oil and gas company Reliance Petroleum Ltd (RPL), a subsidiary of Reliance Industries, India’s largest private sector company, for $300 million with an option to purchase another 24%. The deal was announced on the eve of RPL’s long-awaited IPO. RPL saw a massive build-up in interest from foreign institutional investors even before it opened in mid-April. The $2 billion IPO is India’s biggest so far.

Part of the excitement around the IPO was the result of Reliance’s plans to rapidly grow its refining capacity by December 2008. The planned expansion means Reliance would control the largest refining complex in the world, with a combined crude throughput of 60 million tons a year. According to media reports, the expansion will cost $6 billion—40% less than what it would cost to build elsewhere.

Just as Reliance Petroleum was preparing for its IPO, the Indian stock market took its fourth-worst single-day fall in its history. The Bombay Stock Exchange sensitive index dropped by 353 points on April 12 following weeks of heavy buying and after the Indian indexes posted new all-time highs. Foreign institutional investors, which brought in $11 billion in 2005 and nearly $3 billion in the first three months of 2006, were reportedly reducing exposure to what is now considered an over-heated market.

The enthusiasm shown by investors for Indian stocks had prompted the Ministry of Power to ask seven public sector power companies to list on the stock exchange before the end of the year. Currently, only two public sector power companies are listed: the National Thermal Power Corporation, with a market cap of $20 billion—making it the third-largest listed entity in India—and the Power Trading Corporation. Power Grid Corporation, which owns a large national transmission grid, has said it would consider selling a 10% stake.